Understanding Corporate Security

Sarah Murray
Financial Times (London, England) (Page 11)
July 14, 2004

In 2002, the strike by dockworkers on the west coast of the US revealed just how easy it is to bring industry to a grinding halt. The action paralysed the movement of freight across the Pacific, leaving retailers and manufacturers short of goods and essential parts, and Asian producers with products piling up at their factories and warehouses.

It is not only the potential of dockworkers to lay down their tools that is causing concern. The global transport system has come under intense scrutiny since the September 11 terrorist attacks, which raised the grim prospect of a container being used to transport bombs, nuclear material or chemical weapons. As a result, the US has increasingly been taking measures to secure the supply chain from such events. Manifests for US-bound containers must now be submitted 24 hours before loading. Importers who sign up to the Customs- Trade Partnership Against Terrorism, introduced by US customs to maintain security processes throughout the supply chain, are being held to account - with the speedy processing of goods into the US as an incentive. And, as part of the Container Security Initiative, teams of US inspectors are working in foreign ports to help inspect high-risk shipments before they reach the US. A plethora of new technologies - from RFID (radio frequency identification) technology to high-speed X-ray systems - have emerged as IT companies try to persuade shippers, port authorities and government agencies that their gadgets will provide a solution.

"The trick is to be able to integrate all this in a coherent and logical way," says Ron Maehl, vice-president of Boeing's network-enabled solutions group. "Because the way you would deal with containers going through Rotterdam could be very different to the way you deal with containers going through Marseilles." Boeing is running pilot schemes at the ports of Los Angeles/Long Beach and New York/New Jersey as part of Operation Safe Commerce, a US federally-funded initiative that is enlisting the private sector to evaluate ways of improving the security of container shipments. Using two test supply chains - high-value aircraft parts from Scotland being shipped to New York and containers full of flowerpots going from the Philippines to Los Angeles - the idea is to find ways of integrating information about containers and their movements with IT networks and databases to give the whole supply chain visibility, making any terrorist activity easier to detect. However, terrorist attacks on shipments are not the only threat to the global supply chain. Accidents at factories, natural disasters and suppliers going out of business are all potential risks against which companies must protect themselves. And the success of just-in-time manufacturing - whereby companies produce exactly the right quantity of goods at the right time, thereby reducing the amount of stock held - means that supply chains are increasingly vulnerable to the slightest disruptions.

"Companies are trying to get it just right, to get tighter and tighter with their key partners so everyone can operate in a perfect environment with minimum investment and minimum waste," says Ed Starr, a partner in the supply chain management practice at Accenture, the consultants. "And there are more tools and practices that enable increases in sophistication, which is great. But it does give you less room for error and more exposure to any hiccups." Such hiccups come in all shapes and sizes and affect companies in different ways. At one extreme, certain events impact companies in all sectors, regardless of size. Port closures would hold up all imports and exports, affecting thousands of businesses across a country. At the other extreme, incidents such as a factory fire may only hit one company, but for the organisation involved the impact on business operations could be drastic. Certain events may hit one sector particularly badly. In addition to causing the death of more than 2,000 people, the 1999 earthquake in Taiwan revealed the dependence of computer makers on the country's supply of microchips, memory and motherboards. Leading chipmakers lost several days' production, mainly due to power shortages, creating a knock-on effect throughout the industry.

At MIT's centre for transportation and logistics, a research project called The Supply Chain Response to Terrorism has identified the following types of disruption: Disruption in supply of raw materials and parts. This particularly affects companies operating on a just-in-time basis, because minimal inventory means they must respond extremely quickly to prevent customers being adversely impacted. Transport disruption. Companies that rely on international shipments are more exposed to this risk. Theft and tampering. Companies in the food and pharmaceutical sectors are particularly vulnerable here. Disruption in communication and information flow. Companies relying on e-commerce will be affected if electronic communications and transactions cannot function, particularly if they outsource their manufacturing and need to co-ordinate a complex network of suppliers, contractors, carriers and customers.

Companies need to conduct a careful analysis of exactly which types of supply chain disruptions would be most likely to affect their particular business, the likelihood of such an event and what the maximum damage to the business would be. However, a careful balance needs to be struck between security and the efficiency of business operations. "The real challenge is the tactics you might take to hedge against the broad disruptions versus the more narrow ones," says Mr Starr. "And they are almost contradictory - so if there's an industry-level shortage of certain products, you want to be tied deeply to one supplier who can supply the additional amounts on the margins. But if there's an individual supplier who has a disaster and can't meet schedules, you don't want to be locked up with them - so it's balancing the risk across objectives." Yossi Sheffi, director of the MIT centre, argues that businesses that build flexibility into their products and processes can make their operations more robust.

He cites Hewlett-Packard's strategy in Europe, where its printers are sold in a number of markets, requiring instructions in different languages and a variety of power supply adaptors. The company redesigned both the machines and its distribution network. It now manufactures standardised printers that are sent to a centralised European distribution centre where the right language and power cords are fitted. Such "lean flexibility", he argues, makes companies less exposed to disruptions in the supply chain. "Companies that are used to long production lines, low cost, taking inventory out of the system and shipping full boat loads are more vulnerable," he says. "Those that are more agile day- to-day are more resilient because, by the very nature of their operations, they're used to changing on the fly and moving rapidly between different parts of the world."

Copyright 2004 The Financial Times Limited
Financial Times (London, England)